Cox and Archer: Why $16 Trillion Only Hints at the True U.S. Debt

Hiding the government's liabilities from the public makes it seem that we can tax our way out of mounting deficits. We can't.

By

Chris Cox and Bill Archer

Updated Nov. 28, 2012 12:01 a.m. ET

A decade and a half ago, both of us served on President Clinton's Bipartisan Commission on Entitlement and Tax Reform, the forerunner to President Obama's recent National Commission on Fiscal Responsibility and Reform. In 1994 we predicted that, unless something was done to control runaway entitlement spending, Medicare and Social Security would eventually go bankrupt or confront severe benefit cuts.

Eighteen years later, nothing has been done. Why? The usual reason is that entitlement reform is the third rail of American politics. That explanation presupposes voter demand for entitlements at any cost, even if it means bankrupting the nation.

A better explanation is that the full extent of the problem has remained hidden from policy makers and the public because of less than transparent government financial statements. How else could responsible officials claim that Medicare and Social Security have the resources they need to fulfill their commitments for years to come?

As Washington wrestles with the roughly $600 billion "fiscal cliff" and the 2013 budget, the far greater fiscal challenge of the U.S. government's unfunded pension and health-care liabilities remains offstage. The truly important figures would appear on the federal balance sheet—if the government prepared an accurate one.

But it hasn't. For years, the government has gotten by without having to produce the kind of financial statements that are required of most significant for-profit and nonprofit enterprises. The U.S. Treasury "balance sheet" does list liabilities such as Treasury debt issued to the public, federal employee pensions, and post-retirement health benefits. But it does not include the unfunded liabilities of Medicare, Social Security and other outsized and very real obligations.

As a result, fiscal policy discussions generally focus on current-year budget deficits, the accumulated national debt, and the relationships between these two items and gross domestic product. We most often hear about the alarming $15.96 trillion national debt (more than 100% of GDP), and the 2012 budget deficit of $1.1 trillion (6.97% of GDP). As dangerous as those numbers are, they do not begin to tell the story of the federal government's true liabilities.

ENLARGE

David Klein

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.

Why haven't Americans heard about the titanic $86.8 trillion liability from these programs? One reason: The actual figures do not appear in black and white on any balance sheet. But it is possible to discover them. Included in the annual Medicare Trustees' report are separate actuarial estimates of the unfunded liability for Medicare Part A (the hospital portion), Part B (medical insurance) and Part D (prescription drug coverage).

As of the most recent Trustees' report in April, the net present value of the unfunded liability of Medicare was $42.8 trillion. The comparable balance sheet liability for Social Security is $20.5 trillion.

Were American policy makers to have the benefit of transparent financial statements prepared the way public companies must report their pension liabilities, they would see clearly the magnitude of the future borrowing that these liabilities imply. Borrowing on this scale could eclipse the capacity of global capital markets—and bankrupt not only the programs themselves but the entire federal government.

These real-world impacts will be felt when currently unfunded liabilities need to be paid. In theory, the Medicare and Social Security trust funds have at least some money to pay a portion of the bills that are coming due. In actuality, the cupboard is bare: 100% of the payroll taxes for these programs were spent in the same year they were collected.

In exchange for the payroll taxes that aren't paid out in benefits to current retirees in any given year, the trust funds got nonmarketable Treasury debt. Now, as the baby boomers' promised benefits swamp the payroll-tax collections from today's workers, the government has to swap the trust funds' nonmarketable securities for marketable Treasury debt. The Treasury will then have to sell not only this debt, but far more, in order to pay the benefits as they come due.

When combined with funding the general cash deficits, these multitrillion-dollar Treasury operations will dominate the capital markets in the years ahead, particularly given China's de-emphasis of new investment in U.S. Treasurys in favor of increasing foreign direct investment, and Japan's and Europe's own sovereign-debt challenges.

When the accrued expenses of the government's entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually. That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.

Nothing like that $8 trillion amount is available for the IRS to target. According to the most recent tax data, all individuals filing tax returns in America and earning more than $66,193 per year have a total adjusted gross income of $5.1 trillion. In 2006, when corporate taxable income peaked before the recession, all corporations in the U.S. had total income for tax purposes of $1.6 trillion. That comes to $6.7 trillion available to tax from these individuals and corporations under existing tax laws.

In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn't be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities. Some public officials and pundits claim we can dig our way out through tax increases on upper-income earners, or even all taxpayers. In reality, that would amount to bailing out the Pacific Ocean with a teaspoon. Only by addressing these unsustainable spending commitments can the nation's debt and deficit problems be solved.

Neither the public nor policy makers will be able to fully understand and deal with these issues unless the government publishes financial statements that present the government's largest financial liabilities in accordance with well-established norms in the private sector. When the new Congress convenes in January, making the numbers clear—and establishing policies that finally address them before it is too late—should be a top order of business.

Mr. Cox, a former chairman of the House Republican Policy Committee and the Securities and Exchange Commission, is president of Bingham Consulting LLC. Mr. Archer, a former chairman of the House Ways & Means Committee, is a senior policy adviser at PricewaterhouseCoopers LLP.

we wouldn't be in debt if they stop giving our tax money to WIC, Welfare, Section, criminals or jail system. GET A JOB, STOP OPENING UR LEGS, STOP making babies you can't afford... MALE or FEMALE. (demand DRUG TEST)This individuals get to claim taxes every year and not repay... make they repay the system for the assistance. Take their tax returns difference and once their children turn 18 make them pay the system back until the day or pay the total amount back to the US tax payersthat's where the real debt of the US is

ONLY ones should get any help are US citizens, Service members...

also why are some term on congress paid for only 5 years of service? NO Congress member should be in representation of US, if they aren't service connected whether reserve or active duty term

How could this possibly have been missed or ignored? Any insurance company with such a problem would have hit the panic button years ago..Has the Congress been rearranging the deck chairs on the Titanic? In the meanwhile, the American public sails along, dancing and dining, completely unaware that the ship will sink below the the icy waters in just a few hours.

One hates to say it, but this is typical conservative babel to justy doing nothing but eliminating the social programs of the past 75 years. The US Government is not going bankrupt, and we don't have to solve all the nation's financial problems of the future at once. Let's concentrate on getting through the cliffe, so we can can begin to adress longer standing issues including the reform of social security, medicare and medicaid as well as the reform of personal and corporate tax rates. Yes, all will be addressed before the apocalypse, and no not everyone will be happy with the legislation. So, what is new? The country managed a civil war, wwII, the economic collapse of the 30s,80s and the 00s. And yes, it would be great if we could agree on some basic facts in the current debate.

I think you can count on the Federal Reserve (with no complaints from this or future Gov) to continue to monetize as much of this current/future debt/liability as possible. Who will pay (due to diminished purchasing power) ... the savers/lenders (domestic and foreign) ... domestically its that big attractive group, the Baby Boom Generation ... a great portion who have some form of savings, houses and certainly futures expenditures (lets not forget the possibility of Value Added Tax coming on those expenditures - Europe/Canada already have those taxes)... they (Baby Boomers) are the only game in town when it comes to being tapped going forward (for the next 20-30 years). Foreign lenders will dry up and the US $ will drop (good for the younger generation since jobs would slowly move back on shore). But not good for further imported inflation (all those global commodities will rise in terms of US $). Unfortunately, we are demographically in a poor position to grow our way out this problem .... the monetary solution is too attractive.

We cannot communicate enough about the conveniently ignored unfunded obligations of we the people. I would hope those who put themselves out as experts on the topic would do more to better reference their sources and explain how they differ from USG presentations on the same topic. These authors commit a common omission by ignoring or deriding the balance sheet that US Treasury does report. It would be helpful if more of us took time to critique what is produced. Go to this link and see for yourself: http://www.fms.treas.gov/frsummary/index.html. If you add the Net Position and the Social Insurance obligation you get a total of $48.6 trillion an astonishingly lower number than the $86.8 trillion these authors report. If the WSJ believes in the numbers of Cox and Archer, I can see the headline now: "Treasury understates USG Debt by over $38 Trillion"

"Were American policy makers to have the benefit of transparent financial statements prepared the way public companies must report their pension liabilities, they would see clearly the magnitude of the future borrowing that these liabilities imply."

No they wouldn't. They're clueless and can't read or understand financial statements. They have no conception of too much debt, insolvency, or bankruptcy. They can only learn the hard way. Destroy everything.

"Many persons do not reveal their personal masochism (self-punishment to expiate guilt), but they do participate in mass masochism through political and economic views and activities calculated to fulfill the urge to mass destruction." RJR

"Neither the public nor policy makers will be able to fully understand and deal with these issues unless the government publishes financial statements that present the government's largest financial liabilities in accordance with well-established norms in the private sector."

Even if the government's financial statement show absolutely everything in 3D, their eyes will simply glaze over. How many elected to the Presidency, Senate, or Congress ever took Accounting 101 or Finance 101 in college? They're clueless. It's all just numbers on paper.

The current Administration is pushing the entire Nation over a very real cliff with very real death at the bottom. Since the US dollar is the global reserve currency, Hyper-Stagflation is assured. I speak as a retired CPA.

But even this far gloomier picture doesn't tell the whole story. On top of the "real" debt of $86.8 trillion that the writers uncover, is the enormous unfunded liabilities at the state level. States like California, New York, Illinois, New Jersey and Massachusetts ( they all have more in common than just being Obama supporters) have mountains of liabilities that can never be met even with California levels of robbery.

There's no doubt about it. We are headed towards Greek-level social unrest in this country but with this difference: Unlike the Germans bailing out Greece, we won't have anyone to bail us out.

America is circling the drain and it's citizenry is blissfully unaware.

The majority of voters (52%) in America subscribe to the 'What's in it for me" principal, the consequence of this mass personal indulgence will reverberate around the world.

America has the responsibility as the issuer of the World's Reserve Currency to safeguard the value. This is an obligation that will surley be tossed when the inevitable pressure to reduce debt & deficit becomes intense and the political imperative for the Tax & Spender's shifts from long term crisis managmement to short term panic.

Rectification of this problem will be for the account of the middle class, despite assurances to the contrary. And so since the train wreck is inevitable I would prefer to see the crisis happen sooner rather than latter, that way History will chronical in real time the unmitigated disaster that is the re-election of Barrack Obama.

Perhaps even the trained seals on the left will come to realize their leader lied and messed it up BIG TIME, however most will probably simply repeat their beloved Mantra " It's all George Bush's Fault'. It is at that point you will know the party is over.

"That explanation presupposes voter demand for entitlements at any cost, even if it means bankrupting the nation."

That explanation holds just fine for the people who re-elected Barack Obama to a second term. They don't care what happens to the country in the long run, as long as someone else is paying for what they want right now.

One should be careful to extol over future liabilities... And not consider future income.Does any company account for future liabilities alone - and not consider future income or profits?

Our problem is that Social Security was meant to be a "social safety net" - and because many Americans are complacent about their independence, this program has become the country's pension plan - not at all what it was intended to be....

We have an opportunity to solve this problem - we need leaders who will do just that..

This is a rather flawed comparison. There are many differences between a corporation and a nation.

If a corporation signs a contract to pay $1 T in benefits, it has no ability to change that contract or adjust its income unilatteraly. In contrast, if economic growth over the long term is insufficient, the government can reduce benefits at will. Retirees of the future will consume drugs, medical services, food, and housing. Except for a portion of the latter, the goods will all have to be produced at the time of consumption, so saving money will not provide those goods.

A reduction in benefits today alleviates the problem only to the extent that it results in improved infrastructure and technology to deliver services in the future.

I serve on the board of a small community bank. When regulators assault us on our bookkeeping, their primary purpose is to make certain our books REFLECT REALITY.

The urge I get every time is to ask them to turn their guns on themselves. I would dearly love the regulators to audit the assets and liabilities of the federal government with the same level of scrutiny.

You can ignore reality if you wish, but you cannot forever ignore the CONSEQUENCES of ignoring reality!!!

You would think Conservatives would have learned their lesson and realized that their scare scenarios are not believed by voters. This article is nonsense. The unfunded liabilities is what is projected to be paid out in future compared to the funds anticipated.

Here are things that will reduce the unfunded liabilities.

1. GDP growth increases at and above a 6% rate.2. Raising the income SS are paid on to $250,0003. Tort reform in Medical cases4. Preventing States from establishing health insurance coverage requirements

Here are things that should be done but really aren't absolutely required to alter the unfunded figures1. End grants that fund political activism - political activism should not be taxpayer subsidized2. End all grants to the Social Sciences - all Liberal Social Science is bogus3. Enforce the Monroe Doctrine - America should act only with our allies - and resolutely.

What is my point? People see through the Conservative talking points and need actual solutions. You can;t cry the sky is falling if the SS monster can be made safe for another 10 years by raising the limit on how much income is taxed for Social Security contributions.

And don;t try the argument that people will move their money. Such a change isn't big enough.

This is so easy to control. Social security benefits kick in 1 year after the life expectancy of a male. Medicare applies to unexpected health problems. no lung cancer coverage to smokers, no diabetes coverage to people with BMI over 30, no liver or pancreatic coverage for alcoholics.

The essay by Cox and Archer show just how broken our government has become. Apparently these former government leaders, and the WSJ editors, are unaware that the GAO publishes a financial statement showing the total government debt, including the social programs, as $44.3 Trillion (2010). What the clowns in the GAO (as well as Cox and Archer) omit, apparently on purpose, are the guarantees. These guarantees include Solyndra and many, many other programs of dubious merit. Including these may take the total to north of $100 Trillion!

An honest accounting would be necessary first step in solving our financial problem.

Always annoyed when reading these type of articles as to the definition of "unfunded". Do they mean based on current reserves, or based on current reserves with consideration of a similar level of annual revenue thru taxes into the future.

In other words are they saying this huge debt will appear even if we continue collecting taxes at the same rate as now, or are they playing games with numbers and assuming no more taxes since they aren't technically approved yet in Fed. budget. Perhap sounds ridiculous, but I really wonder...anyone???

Nothing like a stark reminder that we're headed into the financial abyss at breakneck pace to make a guy want to get out of bed and work his butt off for the benefit of the ruling class Fedzilla thugs. I now exist to serve my government. It used to be the other way around. Once upon a time, government existed to serve me and my neighbors by protecting our property and enforcing good laws that facilitated commerce and an orderly society. They were sensible practical laws we broadly agreed upon as useful and necessary. No more.

"Ask not what you can do for your country, but what your country can do for you." Most politicians say that to stay in office, and that is the problem because we the people increasingly demand from others what we will not provide for ourselves.

"Simply removing the cap on the payroll tax would solve the entire Social Security shortfall for 75 years, without raising taxes a dime for people making less than $110,000."

I make less than $110k and I think this is a stupid idea.

If we wanted to turn SS into a welfare program, there are easier ways. We could just cap benefits at the poverty level, and phase out benefits dollar for dollar for any earned income in retirement.

However, if we want to keep SS pretty much as it is now, but improve the finances, we can gradually raise the retirement age to 70 or so, plus index starting benefits to price inflation rather than wage inflation.

Is there any good reason that I should have a better retirement 20-25 years from now than somebody who retires today but did a similar job during his working life? I can't think of a single reason that I'm more deserving than he is.

Yes...we wouldn't want anything like simple math or economics to get in the way of our overflowing compassion. Other than a few "radical right-wing" Republicans in Congress who has even proposed or said they will consider entitlement reform? (crickets chirping)

The American people have received annual written notice from the government for a long time that the Social Security system will run out of money. Just read your annual Social Security Statement! The guy who runs the program says its gonna' go bust! Ronald Reagan talked about reforming SS back in the 70's!Yet nothing has been done since then except to enrich the benefits and expand the program... Sure gets lots of votes though!

So please explain to us conservative peasants the way forward here and who exactly is leading the charge?

When Kalifornication, and ILLiNOISE start demanding the rest of America pay for their Dimwit led spending spree, it's time for Civil War II. That's when the Libbies will regret Conservatives' passion for exercising their Second Amendment rights.

@Anne, There will be no money to run those drones because Libbies HATE funding anything military. SEAL teams won't support the side that breaks the Constitution, so those drones will be about as useful as they were against Obama Bin Laden.

Yes, the train is coming, the whistles are blowing and most assume everything will be OK since the government will do more prestidigitation to save their SS, medicare etc. Some do see it coming. After election day three people in my profession whom I know of cashed out and took early SS. The avoided the higher Capital Gains if they had worked another 4-5 years. They will be on the government teat earlier than expected. They will be increasing the National Debt sooner than expected.

This just kicks the can down the road. GDP won't ever reach 6% if we keep talking about raising taxes on the rich only (elimination of deductions is far more rewarding from a revenue raise standpoint). Democrats will never allow Tort reform (it will only occur if the Republicans gain a majority - which is unlikely) so this is unrealistic. Numbers still don't add up if this fantasy came true.

Medicare and Social Security were funtional pyramid schemes with the demographic shifts that began around the time of their inception. They were made worse when your temporary politicians, as a means of securing your undying allegience, started taking out money and leaving IOU's behind.

You won't be able to retire securly if this is what you are depending upon, but at least they have bought your allegience.

Its the present value of the difference between payouts and taxes dedicated to the programs. Usually there is a 75-year calculation and infinite calculation done by the Social Security Administration. Medicare is around $37T for 75-year and $56T infinite and Social Security around $9T for 75-year and $21T for infinite.

My understanding is yes, this huge debt will appear even if we continue collecting taxes at the same rate as now. Actually the debt already exists, the government just doesn't show it on the balance sheet.

Unfunded liability is the expected obligations in future years less tax receipts at the current rate in those future years discounted to the present. The amount owed is actually much larger without the discounting.

Your argument is one I've shared for years but I think we are both wrong! But, we come at this from different times in our careers. I've been retired from regular employment for 23 years and 13 years since I closed my consulting business and from about 1980 to 1999, my pay was over the maxi. However, the problem is two fold. The income distribution today is ridiculous. In 82 the ratio of CEO to worker pay was less than 20. Today it is 206 to 332, depending on your data source. This means simply that the payroll tax source has been reduced to pay more to parasites, e.g. those benefiting for HFT as well as upper management. I still believe that the taxable income max should be maintained but the income tax rates of the 50s (adjusted for inflation) should be restored (e.g 90 % for 10 mil and more). We also need to understand that the payroll tax revenue will jump if the economy picks up and the spread in pay is restored to a level consistent with a civilized country.

WRT Medicare, we should more toward the French system which is the most effective and least costly of any in the world. I know little about it but it isn't burdened by parasitic private insurance companies.

This is actually for Mr. Vankuran. I agree. These are home-movies from my family.

I joined the Army, went to college, got a job, worked hard, went to graduate school, worked hard, earned a Ph.D., and got promoted to a decent plateau, where I have great people working for me and make a fair paycheck. I'm likely going to have a comfortable retirement, based on my own savings and a small pension from my employer (I know, a private pension, boy, I know how precious that is)

My sister, who barely finished high school, has as her occupation producing illegimate children and applying for and appealing to get on SSDI, when she is not trying to borrow money from me. I think she last worked in circa 2002-2003. Guess who's the Democrat and who's the Libertarian in our family?

Someone is going to have to pay more and some folks will have to get less. Raising the retirement age is very unfair to the poor (who don't live as long as those who get better healthcare) and those who do manual labor (whose bodies cannot keep it going that long).

Indexing is a good idea, if done progressively.

Certainly asking the wealthier folks who benefit most from this globalized free market system (90% of the income growth of the past decade went to the top 10%) to pay for the rest of us is getting more and more equitable every year, as wages stagnate and jobs become more scare due to offshoring, no?

You miss the point.So I will state it for you. If you believe, and you are correct, that "GDP won't ever reach 6% if we keep talking about raising taxes on the rich only (elimination of deductions is far more rewarding from a revenue raise standpoint)." then Romney is your man, and Ryan is your man.

You fail to see that Conservatives dissed the both of them, accused them of not espousing clear and strong enough Conservative principals in the campaign when to the contrary and in in actual fact Romney and Ryan were and are to the right of the candidates, and the positions their candidates espoused, the Conservative's favored over Romney.

You really do not see it. Conservatives are trying to argue that that we have a terrible problem with Republicans in general, emblematic of which iwas the Romney Campaign, and this is defeating us.

In other words, the existence of a few Rhino's and some problems with the National Republican Party, effectively has censored and dampened to the point of ineffectiveness the political will and expression of the American people.

Ludicrous. When the Tea Party breaks free of these Conservatives and, if necessary, the leadership of the Tea Party as well, then, and not until then, will we Americans have the Government we want.

Walmart greeters are no more. Walmart got rid of them in a cost cutting move. Of course, Walmart sets up tables for new hires on how to drain taxpayer funded services. A real "Made in America" company. Ptouee! I shop at Costco.

I'm tired of all the worry about the poor. Especially since most that I have observed have been retired since birth, and have lead completely useless, and unproductive lives.

I keep hearing about this shared sacrifice stuff, and I see a whole lot of people who are not set themselves willing to step up and pay more to make up for what forty years of bad politicians have squandered, yet, I never have seen a welfare slob offer to change their trajectory in life one degree.

How about losing weight, taking a shower, having less kids, going to school, trying to join in the economy aside from selling dope. Not one, and I know a lot of them, have a care about any of what you are fretting over.

Is it fair that the top 5% pay over half the income tax? Is it fair the bottom 50% pay no income tax? No, it isn't . I'm surprised the top earners don't rebel. It's amazing they take the abuse from the White House when they are paying for the programs that get these weasels in DC elected.

Ah, yes. Fairness. And progressivity. 'Tax that man and give his wealth to me. I will vote for you. Forever. It is only fair. It is only progressive. Modern.' We are much further down the Road to Serfdom than anyone seems to realize. Hence comments such as this.

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